Category Archives: Reporting

So Many Form 10-Q and 10-K Changes! [Part 4 of 5] Details of Share Repurchase Disclosure Modernization

Hot Topic, Reporting

As we overviewed in the first post in this series, in late 2022 and early 2023, the SEC adopted four Final Rules that created a raft of new and detailed reporting requirements in Forms 10-Q and 10-K.

This is the fourth of five posts that provide details and suggestions to help companies analyze and implement these changes in upcoming periodic reports. This post goes into detail about the disclosure changes from the SEC’s May 2023 Final Rule “Share Repurchase Disclosure Modernization.”

And, to help keep track of the topics we will explore, here is a reminder list of our current and future posts in this series to help you implement all these new disclosure requirements:

Current posts:

Future post:

    • Pay Versus Performance Disclosures (Proxy statement only disclosures) [Part 5 of 5]

As a preliminary note, as you read this post you will see that the new disclosures for share repurchases are the same in Forms 10-K and 10-Q.

Details of Form 10-Q Changes for Share Repurchase Disclosure Modernization

The three changes to Form 10-Q from the Share Repurchase Disclosure Modernization Final Rule are:

1. Part II – Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities. The old month-by-month table of share repurchases has been removed.  New language in S-K Item 703 requires narrative disclosure of the rationale and purpose of share repurchases.  These changes are effective for the first full fiscal quarter beginning on or after October 1, 2023 (Note:  As discussed in the 10-K section below, this disclosure is required for all quarters, including the fourth quarter.  Thus, the first time that this will appear for calendar year-end companies is the 10-K for the year ended December 31, 2023). 

(Note:  As noted below, new exhibit 26 requires details of share repurchases.)

2. Part II – Item 5. Other Information now requires disclosure of company Rule 10b5-1 plans.  The transition for this new disclosure is the same as for number 1 above.

3. Part II – Item 6 – Exhibits. New exhibit 26 requires daily details of share repurchases.  The transition for this new disclosure is the same as for number 1 above. 

1. The mechanics of the change to Part II – Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities, begin with this new paragraph (c) to the instructions to the form:

Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities.

***

(c) Furnish the information required by Item 703 of Regulation S-K (§ 229.703 of this chapter) for any repurchases made in the quarter covered by the report.

Regulation S-K Item 703 had been revised to remove the old monthly repurchase table and now provides:

229.703 (Item 703) Purchases of equity securities by the issuer and affiliated purchasers.

(a) Disclose the specified information in narrative form with respect to the issuer’s repurchases of equity securities disclosed pursuant to § 229.601(b)(26) (Item 601(b)(26) of Regulation S-K) and refer to the particular repurchases in the table in Item 601(b)(26) of Regulation S-K that correspond to the different parts of the narrative, if applicable:

(1) The objectives or rationales for each repurchase plan or program and the process or criteria used to determine the amount of repurchases.

(2) The number of shares (or units) purchased other than through a publicly announced plan or program, and the nature of the transaction (e.g., whether the purchases were made in open-market transactions, tender offers, in satisfaction of the issuer’s obligations upon exercise of outstanding put options issued by the issuer, or other transactions).

(3) For publicly announced repurchase plans or programs:

(i) The date each plan or program was announced;
(ii) The dollar amount (or share or unit amount) approved;
(iii) The expiration date (if any) of each plan or program;
(iv) Each plan or program that has expired during the period covered by the table in Item 601(b)(26) of Regulation S-K;

(v) Each plan or program the issuer has determined to terminate prior to expiration, or under which the issuer does not intend to make further purchases.

(4) Any policies and procedures relating to purchases and sales of the issuer’s securities by its officers and directors during a repurchase program, including any restrictions on such transactions.

(b) The disclosure provided pursuant to paragraph (a) of this section must be provided in an Interactive Data File as required by § 232.405 of this chapter (Rule 405 of Regulation S-T) in accordance with the EDGAR Filer Manual. 

2. The mechanics of the change to Part II – Item 5. Other Information, begin with the addition of this new paragraph (c) to the instructions to the form, which refers to new S-K Item 408(d):

Item 5. Other Information.
*****

(c) Furnish the information required by Items 408(a) and 408(d) of Regulation S-K ((§§ 229.408(a) and 229.408(d)).

Regulation S-K Item 408 now includes new paragraph (d) requiring disclosure of company use of Rule 10b5-1 plans.

229.408 (Item 408) Insider trading arrangements and policies.

*****

(d)(1) Disclose whether, during the registrant’s last fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report), the registrant adopted or terminated any Rule 10b5-1 trading arrangement as that term is defined in paragraph (a)(1)(i) of this section. In addition, provide a description of the material terms of the Rule 10b5-1 trading arrangement (other than terms with respect to the price at which the party executing the Rule 10b5-1 trading arrangement is authorized to trade), such as:

(i) The date on which the registrant adopted or terminated the Rule 10b5-1 trading arrangement;

(ii) The duration of the Rule 10b5-1 trading arrangement; and

(iii) The aggregate number of securities to be purchased or sold pursuant to the Rule 10b5-1 trading arrangement.

Note 1 to paragraph (d)(1): If the disclosure provided pursuant to § 229.703 contains disclosure that would satisfy the requirements of paragraph (d)(1) of this section, a cross- reference to that disclosure will also satisfy the requirements of paragraph (d)(1).

(2) The disclosure provided pursuant to paragraph (d)(1) of this section must be provided in an Interactive Data File as required by § 232.405 of this chapter (Rule 405 of Regulation S-T) in accordance with the EDGAR Filer Manual.

 

3. The mechanics of the change to Part II – Item 6 – Exhibits are to add new exhibit 26:

New exhibit 26 provides for many details about daily repurchases which are summarized in this table.  The detailed instructions to the exhibit are included at the end of this post.

ISSUER PURCHASES OF EQUITY SECURITIES

Use the checkbox to indicate if any officer or director reporting pursuant to section 16(a) of the Exchange Act (15 U.S.C. 78p(a)), or for foreign private issuers as defined by Rule 3b-4(c) (17 CFR 240.3b-4(c)), any director or member of senior management who would be identified pursuant to Item 1 of Form 20-F (17 CFR 249.220f), purchased or sold shares or other units of the class of the issuer’s equity securities that are registered pursuant to section 12 of the Exchange Act and subject of a publicly announced plan or program within four (4) business days before or after the issuer’s announcement of such repurchase plan or program or the announcement of an increase of an existing share repurchase plan or program. □

This table must be tagged with iXBRL.

 

Details of Form 10-K Changes for Share Repurchase Disclosure Modernization

The three changes to Form 10-K from the Share Repurchase Disclosure Modernization Final Rule are:

    • 1. Part II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.  The old month-by-month table of share repurchases has been removed.  New language in S-K Item 703 requires narrative disclosure of the rationale and purpose of share repurchases.  These changes are effective for the first full fiscal quarter beginning on or after October 1, 2023.  This disclosure is required for all quarters, including the fourth quarter. Thus, the first time that this will appear in Form 10-K for calendar year-end companies is the 10-K for the year ended December 31, 2023.

 (Note:  New exhibit 26 requires daily details of share repurchases.)

    • 2. Part II – Item 9B. Other Information now requires disclosure of company Rule 10b5-1 plans.  The transition for this new disclosure is the same as for number 1 above.

    • 3. Part VI – Item 15. – Exhibits. New exhibit 26 requires daily details of share repurchases.  The transition for this new disclosure is the same as for number 1 above.

1.  The mechanics of the changes to Part II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities, begin with the addition of this new paragraph (c) to the instructions for Part II Item 5 of the form:

Item 5. . Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

***

(c) Furnish the information required by Item 703 of Regulation S-K (§ 229.703 of this chapter) for any repurchase made in the fourth quarter of the fiscal year covered by the report.

Revised S-K Item 703 is reviewed above in the section addressing the related change in Form 10-Q Part II – Item 2.

2.  The mechanics of the changes to Part II Item 9B. Other Information begin with the addition of S-K Item 408(d) to paragraph (b) of the Item 9B instructions:

(b) Furnish the information required by Items 408(a) and 408(d) of Regulation S-K (§§ 229.408(a) and 229.408(d)of this chapter).

New S-K Item 408 is reviewed above in the section addressing the related change in Form 10-Q Part II – Item 5.

3.  The mechanics of the change to Item 15. Exhibit and Financial Statement Schedules are to add new exhibit 26, which is discussed above with the related changes to Part II – Item 6 of Form 10-Q.

As always, your thoughts and comments are welcome!

_______________________________________________________________________

As mentioned above, below are the detailed requirements for new exhibit 26:

(26) Purchases of equity securities by the issuer and affiliated purchasers.

(i) Every issuer that has a class of equity securities registered pursuant to section 12 of the Exchange Act (15 U.S.C. 781) that files quarterly reports on Form 10-Q or an annual report on Form 10-K must file, in the following tabular format, an exhibit to those reports disclosing, for the period covered by the report (or the issuer’s fourth fiscal quarter, in the case of an annual report on Form 10-K), the total purchases made each day by or on behalf of the issuer or any “affiliated purchaser,” as defined in § 240.10b-18(a)(3) of this chapter, of shares or other units of any class of the issuer’s equity securities that are registered by the issuer pursuant to section 12 of the Exchange Act.

(ii) The information provided pursuant to this paragraph (b)(26) must be provided in an Interactive Data File as required by § 232.405 of this chapter (Rule 405 of Regulation S-T) in accordance with the EDGAR Filer Manual.

(iii) This paragraph (b)(26) shall not apply to an investment company registered under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.).

(iv) Disclose in the table:

(A) The date, which is the date on which the purchase of shares (or units) is executed (column (a));

(B) The class of shares (or units), which should clearly identify the class, even if the issuer has only one class of securities outstanding (column (b));

(C) The total number of shares (or units) purchased on this date, which includes all shares (or units) purchased by or on behalf of the issuer or any affiliated purchaser, regardless of whether made pursuant to publicly announced repurchase plans or programs (column (c));

(D) The average price paid per share (or unit), which shall be reported in U.S. dollars and exclude brokerage commissions and other costs of execution (column (d));

(E) The total number of shares (or units) purchased on this date as part of publicly announced repurchase plans or programs (column (e));

(F) The aggregate maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the publicly announced repurchase plans or programs (column (f));

(G) Total number of shares (or units) purchased on this date on the open market, which includes all shares (or units) repurchased by the issuer in open-market transactions, and does not include shares (or units) purchased in tender offers, in satisfaction of the issuer’s obligations upon exercise of outstanding put options issued by the issuer, or other transactions (column (g));

(H) Total number of shares (or units) purchased on this date that are intended by the issuer to qualify for the safe harbor in § 240.10b-18 of this chapter (Rule 10b-18) (column (h)); and

(I) Total number of shares (or units) purchased on this date pursuant to a plan that is intended by the issuer to satisfy the affirmative defense conditions of § 240.10b5-1(c) of this chapter (Rule 10b5-1(c)) (column (i)).

(v) Disclose, by footnote to the table, the date any plan that is intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) for the shares (or units) in column (i) was adopted or terminated.

(vi) In determining whether to check the box under “Issuer Purchases of Equity Securities,” the issuer may rely on the following, unless the issuer knows or has reason to believe that a form was filed inappropriately or that a form should have been filed but was not:

(A) A review of Forms 3 and 4 (§§ 249.103 and 249.104 of this chapter) and amendments thereto filed electronically with the Commission during the issuer’s most recent fiscal year;

(B) A review of Form 5 (§ 249.105 of this chapter) and amendments thereto filed electronically with the Commission with respect to the issuer’s most recent fiscal year;

(C) Any written representation from the reporting person that no Form 5 is required.
The issuer must maintain the representation in its records for two years, making a copy available to the Commission or its staff upon request; and

(D) For foreign private issuers, any written representations from the directors and senior management who would be identified pursuant to Item 1 of Form 20-F, provided that the reliance is reasonable. The issuer must maintain the representation in its records for two years, making a copy available to the Commission or its staff upon request.

So Many Form 10-Q and 10-K Changes![Part 3 of 5] – Listing Standards for Recovery of Erroneously Awarded Compensation Disclosures

Hot Topic, Reporting, Uncategorized

As we overviewed in the first post in this series, in late 2022 and early 2023, the SEC adopted four Final Rules that created a raft of new and detailed reporting requirements in Forms 10-Q and 10-K.

This is the third of five posts that provide details and suggestions to help companies analyze and implement these changes in upcoming periodic reports. This post goes into detail about the disclosure changes from the SEC’s October 2022 Final Rule “Listing Standards for Recovery of Erroneously Awarded Compensation.”

And, to help keep track of the topics we will explore, here is a reminder list of our current and future posts in this series to help you implement all these new disclosure requirements:

Current posts:

    • Listing Standards for Recovery of Erroneously Awarded Compensation Disclosures [This post – Part 3 of 5]

Future posts:

    • Share Repurchase Disclosure Modernization [Part 4 of 5]
    • Pay Versus Performance Disclosures (Proxy statement only disclosures) [Part 5 of 5]

As a preliminary note, as you read this post, the Listing Standards for Recovery of Erroneously Awarded Compensation Final Rule does not create any new disclosures in Form 10-Q.

Details of Form 10-K Changes for Listing Standards for Recovery of Erroneously Awarded Compensation

The four changes to Form 10-K from Listing Standards for Recovery of Erroneously Awarded Compensationare:

    • 1.  Two new check boxes on the cover page related to clawback disclosures:

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. □

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). □

These boxes have already been added to the cover of the 10-K.  As they are on the official form, all filers should include them on the cover page.  However, they will apply only to issuers with exchange-listed securities.  Additionally, for those issuers, no response to the disclosures is required until after October 2, 2023, when the exchange listing standards become effective.

    • 2.  Item 11. Executive Compensation. – now requires details of any recovery of erroneously awarded compensation (S-K 402(w)), and related changes to executive compensation disclosures.  These disclosures are required on or after December 1, 2023 for issuers who have securities listed on a national securities exchange.
    • 3.  Item 13. Certain Relationships and Related Transactions, and Director Independence. – has administrative updates related to recovery of erroneously awarded compensation (S-K Item 404, Instruction 5a).  The transition is the same as number 2 above.
    • 4.  Item 15. Exhibit and Financial Statement Schedules. – includes new exhibit 97 for clawback policies.  The transition is the same as number 2 above.

1. As mentioned above, the new cover page check boxes are in place now. You can find the current version of the Form 10-K Instructions here.  You can read more about the checkboxes and review CorpFin’s related Compliance and Disclosure Interpretations in this blog post.

2. The mechanics of the change to Item 11. Executive Compensation do not require any updates to the instructions to the form, as the Item 11 instructions already refer to S-K Item 402. New paragraph (w) has been added to S-K item 402.

S-K Item 402(w) requires the following disclosures:

(w) Disclosure of a registrant’s action to recover erroneously awarded compensation.

(1) If at any time during or after the last completed fiscal year the registrant was required to prepare an accounting restatement that required recovery of erroneously awarded compensation pursuant to the registrant’s compensation recovery policy required by the listing standards adopted pursuant to 17 CFR 240.10D-1, or there was an outstanding balance as of the end of the last completed fiscal year of erroneously awarded compensation to be recovered from the application of the policy to a prior restatement, the registrant must provide the following information:

(i) For each restatement:

(A) The date on which the registrant was required to prepare an accounting restatement;

(B) The aggregate dollar amount of erroneously awarded compensation attributable to such accounting restatement, including an analysis of how the amount was calculated;

(C) If the financial reporting measure as defined in 17 CFR 240.10D-1(d) related to a stock price or total shareholder return metric, the estimates that were used in determining the erroneously awarded compensation attributable to such accounting restatement and an explanation of the methodology used for such estimates;

(D) The aggregate dollar amount of erroneously awarded compensation that remains outstanding at the end of the last completed fiscal year; and

(E) If the aggregate dollar amount of erroneously awarded compensation has not yet been determined, disclose this fact, explain the reason(s) and disclose the information required in paragraphs (w)(1)(i)(B) through (D) of this section in the next filing that is required to include disclosure pursuant to Item 402 of Regulation S-K;

(ii) If recovery would be impracticable pursuant to 17 CFR 240.10D-1(b)(1)(iv), for each current and former named executive officer and for all other current and former executive officers as a group, disclose the amount of recovery forgone and a brief description of the reason the listed registrant decided in each case not to pursue recovery; and

(iii) For each current and former named executive officer from whom, as of the end of the last completed fiscal year, erroneously awarded compensation had been outstanding for 180 days or longer since the date the registrant determined the amount the individual owed, disclose the dollar amount of outstanding erroneously awarded compensation due from each such individual.

(2) If at any time during or after its last completed fiscal year the registrant was required to prepare an accounting restatement, and the registrant concluded that recovery of erroneously awarded compensation was not required pursuant to the registrant’s compensation recovery policy required by the listing standards adopted pursuant to 17 CFR 240.10D-1, briefly explain why application of the recovery policy resulted in this conclusion.

(3) The information must appear with, and in the same format as, the rest of the disclosure required to be provided pursuant to this Item 402. The information is required only in proxy or information statements that call for Item 402 disclosure and the registrant’s annual report on Form 10-K, and will not be deemed to be incorporated by reference into any filing under the Securities Act, except to the extent that the listed registrant specifically incorporates it by reference.

(4) The disclosure must be provided in an Interactive Data File in accordance with Rule 405 of Regulation S-T and the EDGAR Filer Manual.

In addition to new paragraph S-K Item 402(w), the Recovery of Erroneously Awarded Compensation rule makes two changes to adjust disclosures in the Summary Compensation Table for recovered amounts:

Instructions to Item 402(c).

      1. Reduce the amount reported in the applicable Summary Compensation Table column for the fiscal year in which the amount recovered initially was reported as compensation by any amounts recovered pursuant to a registrant’s compensation recovery policy required by the listing standards adopted pursuant to 17 CFR 240.10D-1, and identify such amounts by footnote.

Instructions to Item 402(n).

      1. Reduce the amount reported in the applicable Summary Compensation Table column for the fiscal year in which the amount recovered initially was reported as compensation by any amounts recovered pursuant to the compensation recovery policy required by the listing standards adopted pursuant to 17 CFR 240.10D-1, and identify such amounts by footnote.

3. The mechanics of the change to Item 13. Certain Relationships and Related Transactions, and Director Independence do not require any updates to the instructions to the form, as the Item 13 instructions already refer to S-K Item 404. New instruction 5.a.iii has been added to S-K item 404, and provides an exception to related transaction reporting if a transaction relates to a clawback event and has been appropriately reported:

Instructions to Item 404(a). * * * 5.a. * * *

5.a. Disclosure of an employment relationship or transaction involving an executive officer and any related compensation solely resulting from that employment relationship or transaction need not be provided pursuant to paragraph (a) of this Item if:

***

iii. The transaction involves the recovery of erroneously awarded compensation computed as provided in 17 CFR 240.10D-1(b)(1)(iii) and the applicable listing standards for the registrant’s securities, that is disclosed pursuant to Item 402(w) (§229.402(w)).

 

4. The mechanics of the change to Item 15. Exhibit and Financial Statement Schedules are to add new exhibit 97:

(b) * * *

(97) Policy relating to recovery of erroneously awarded compensation. A registrant that at any time during its last completed fiscal year had a class of securities listed on a national securities exchange registered pursuant to section 6 of the Exchange Act (15 U.S.C. 78f) or a national securities association registered pursuant to section 15A of the Exchange Act (15 U.S.C. 78o-3) must file as an exhibit to its annual report the compensation recovery policy required by the applicable listing standards adopted pursuant to 17 CFR 240.10D-1.

You can read more about the adoption of appropriate clawback policies and find a link to a template policy in this blog post.

As always, your thoughts and comments are welcome!

 

So Many Form 10-Q and 10-K Changes! [Part 2 of 5] Insider Trading Arrangements and Related Disclosures (Rule 10b5-1 Plans)

Hot Topic, Reporting, Uncategorized

As we overviewed in the first post in this series, in late 2022 and early 2023, the SEC adopted four Final Rules that created a raft of new and detailed reporting requirements in Forms 10-Q and 10-K.

This is the second of five posts that provide details and suggestions to help companies analyze and implement these changes in upcoming periodic reports. This post goes into detail about the disclosure changes from the SEC’s December 2022 Final Rule “Insider Trading Arrangements and Related Disclosures (Rule 10b5-1 Plans).” 

And, to help keep track of the topics we will explore, here is a reminder list of our current and future posts in this series to help you implement all these new disclosure requirements:

Current posts:

Future posts:

    • Listing Standards for Recovery of Erroneously Awarded Compensation Disclosures [Part 3 of 5]
    • Share Repurchase Disclosure Modernization Disclosures [Part 4 of 5]
    • Pay Versus Performance Disclosures (Proxy statement only disclosures) [Part 5 of 5]

Details of Form 10-Q Changes for Insider Trading Arrangements and Related Disclosures

The changes to Form 10-Q from the Insider Trading Arrangements and Related Disclosures (Rule 10b5-1 Plans) Final Rule are in Part II – Item 5 – Other Information, where disclosure of officer and director Rule 10b5-1 plans and “non-10b5-1 trading arrangements” is now required.

This change was effective for the first full fiscal quarter beginning on or after April 1, 2023 – i.e., now.

The mechanics of this change start with this modification to the instructions to Part II – Item 5, adding new paragraph (c):

Item 5. Other Information.

*****
(c) Furnish the information required by Item 408(a) of Regulation S-K (17 CFR 229.408(a)).

S-K Item 408(a) requires the following disclosures:

229.408 (Item 408) Insider trading arrangements and policies.

(a)(1) Disclose whether, during the registrant’s last fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report), any director or officer (as defined in § 240.16a-1(f) of this chapter) adopted or terminated:

(i) Any contract, instruction or written plan for the purchase or sale of securities of the registrant intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) (§ 240.10b5- 1(c) of this chapter) (a “Rule 10b5-1 trading arrangement”); and/or

(ii) Any “non-Rule 10b5-1 trading arrangement” as defined in paragraph (c) of this section.

(2) Identify whether the trading arrangement is intended to satisfy the affirmative defense of Rule 10b5-1(c), and provide a description of the material terms, other than terms with respect to the price at which the individual executing the Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement is authorized to trade, such as:

(A) The name and title of the director or officer;

(B) The date on which the director or officer adopted or terminated the trading arrangement;

(C) The duration of the trading arrangement; and

(D) The aggregate number of securities to be purchased or sold pursuant to the trading arrangement.

(3) The disclosure provided pursuant to paragraphs (a)(1) and (2) of this section must be provided in an Interactive Data File as required by 17 CFR 232.405 (Rule 405 of Regulation S-T) in accordance with the EDGAR Filer Manual.

(Note:  Company 10b5-1 plan disclosure is required by the Share Repurchase Final Rule and will be reviewed in Post 4 of 5.)

Details of Form 10-K Changes for Insider Trading Arrangements and Related Disclosures

The four changes to Form 10-K from the Insider Trading Arrangements and Related Disclosures (Rule 10b5-1 Plans) Final Rule are in:

    • 1.  Part II – Item 9B. Other Information, where disclosure of officer and director Rule 10b5-1 plans and “non-10b5-1 trading arrangements” is now required.  This change is effective for Form 10-K if it contains a fourth quarter that begins on or after April 1, 2023.  Thus, it will also be effective for a fiscal year that ends on or after June 30, 2023.
    • 2.  Part III – Item 10. Directors, Executive Officers and Corporate Governance, which now includes information about insider trading policies. This change is effective for 10-Ks for fiscal years ending on or after December 31, 2024 as well as for proxy statements for 2025 annual meetings.
    • 3.  Part III – Item 11. Executive Compensation, which now requires disclosures about policies and practices related to the grant of certain equity awards close in time to the release of material nonpublic information.  This change is effective for 10-Ks for fiscal years ending on or after December 31, 2024 as well as for proxy statements for 2025 annual meetings.
    • 4.  Part IV – Item 15. Exhibit and Financial Statement Schedules, which now includes exhibit 19 for insider trading policies.  This change is effective for 10-Ks for fiscal years ending on or after December 31, 2024. 

1.  The mechanics of the change to Item 9B start with this modification to the instructions:

PART II – Item 9B. Other Information

Furnish the information required by Item 408(a) of Regulation S-K (§ 229.408(a) of this chapter).

S-K Item 408(a) requires the following disclosures:

229.408 (Item 408) Insider trading arrangements and policies.

(a)(1) Disclose whether, during the registrant’s last fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report), any director or officer (as defined in § 240.16a-1(f) of this chapter) adopted or terminated:

(i) Any contract, instruction or written plan for the purchase or sale of securities of the registrant intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) (§ 240.10b5- 1(c) of this chapter) (a “Rule 10b5-1 trading arrangement”); and/or

(ii) Any “non-Rule 10b5-1 trading arrangement” as defined in paragraph (c) of this section.

(2) Identify whether the trading arrangement is intended to satisfy the affirmative defense of Rule 10b5-1(c), and provide a description of the material terms, other than terms with respect to the price at which the individual executing the Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement is authorized to trade, such as:

(A) The name and title of the director or officer;

(B) The date on which the director or officer adopted or terminated the trading arrangement;

(C) The duration of the trading arrangement; and

(D) The aggregate number of securities to be purchased or sold pursuant to the trading arrangement.

(3) The disclosure provided pursuant to paragraphs (a)(1) and (2) of this section must be provided in an Interactive Data File as required by 17 CFR 232.405 (Rule 405 of Regulation S-T) in accordance with the EDGAR Filer Manual.

2.  The mechanics of the change to Item 10 start with this modification to the instructions to include S-K Item 408(b):

Item 10. Directors, Executive Officers and Corporate Governance

Furnish the information required by Items 401, 405, 406, 407(c)(3), (d)(4), (d)(5), and 408(b) of Regulation S-K (§ 229.401, § 229.405, § 229.406, § 229.407(c)(3), (d)(4), (d)(5), and § 229.408(b) of this chapter).

S-K Item 408(b) requires the following disclosures:

229.408 (Item 408) Insider trading arrangements and policies.

(b)(1) Disclose whether the registrant has adopted insider trading policies and procedures governing the purchase, sale, and/or other dispositions of the registrant’s securities by directors, officers and employees, or the registrant itself, that are reasonably designed to promote compliance with insider trading laws, rules and regulations, and any listing standards applicable to the registrant. If the registrant has not adopted such policies and procedures, explain why it has not done so.

(2) If the registrant has adopted insider trading policies and procedures, the registrant must file such policies and procedures as an exhibit. If all of the registrant’s insider trading policies and procedures are included in its code of ethics (as defined in 17 CFR 229.406(b)) and the code of ethics is filed as an exhibit pursuant to 17 CFR 229.406(c)(1), that would satisfy the exhibit requirement of this paragraph.

(3) The disclosure provided pursuant to paragraph (b)(1) of this section must be provided in an Interactive Data File as required by 17 CFR 232.405 in accordance with the EDGAR Filer Manual.

3.  The mechanics of the change to Item 11. Executive Compensation do not require any updates to the instructions to the form, as the Item 11 instructions already refer to S-K Item 402. New paragraph (x) has been added to S-K item 402.

229.402 (Item 402) Executive compensation.

*****
(x) Disclosure of the registrant’s policies and practices related to the grant of certain equity awards close in time to the release of material nonpublic information.

(1) Discuss the registrant’s policies and practices on the timing of awards of options in relation to the disclosure of material nonpublic information by the registrant, including how the board determines when to grant such awards (for example, whether such awards are granted on a predetermined schedule); whether the board or compensation committee takes material nonpublic information into account when determining the timing and terms of such an award, and, if so, how the board or compensation committee takes material nonpublic information into account when determining the timing and terms of such an award; and whether the registrant has timed the disclosure of material nonpublic information for the purpose of affecting the value of executive compensation.

(2) (i) If, during the last completed fiscal year, the registrant awarded options to a named executive officer in the period beginning four business days before the filing of a periodic report on Form 10-Q (§ 249.308a of this chapter) or Form 10-K (§ 249.310 of this chapter), or the filing or furnishing of a current report on Form 8-K (§ 249.308 of this chapter) that discloses material nonpublic information (other than a current report on Form 8-K disclosing a material new option award grant under Item 5.02(e) of that form), and ending one business day after the filing or furnishing of such report provide the information specified in paragraph (x)(2)(ii) of this section, concerning each such award for each of the named executive officers in the following tabular format:

(ii) The Table shall include:

(A) The name of the named executive officer (column (a));

(B) On an award-by-award basis, the grant date of the option award reported in the table (column (b));

(C) On an award-by-award basis, the number of securities underlying the options, (column (c));

(D) On an award-by-award basis, the per-share exercise price of the options (column (d));

(E) On an award-by-award basis, the grant date fair value of each award computed using the same methodology as used for the registrant’s financial statements under generally accepted accounting principles (column (e)).

(F) For each instrument reported in column (b), disclose the percentage change in the market price of the underlying securities between the closing market price of the security one trading day prior to and the trading day beginning immediately following the disclosure of material nonpublic information (column (f)).

Instruction to paragraph (x)(2). A registrant that is a smaller reporting company or emerging growth company may limit the disclosures in the table to its PEO, the two most highly compensated executive officers other than the PEO who were serving as executive officers at the end of the last completed fiscal year, and up to two additional individuals who would have been the most highly compensated but for the fact that the individual was not serving as an executive officer at the end of the last completed fiscal year.

(3) The disclosure provided pursuant to this paragraph (x) must be provided in an Interactive Data File as required by 17 CFR 232.405 (Rule 405 of Regulation S-T) in accordance with the EDGAR Filer Manual.

4. The mechanics of the change to Item 15. Exhibit and Financial Statement Schedules are to add new exhibit 19:

(b)* * *

(19) Insider trading policies and procedures. Any insider trading policies and procedures, or amendments thereto, that are the subject of the disclosure required by § 229.408(b) (Item 408(b) of Regulation S-K).

(Note:  S-K Item 408(b) is reviewed above with Item 10 changes.)

To implement all these new disclosure requirements companies will need to establish a process and appropriate disclosure controls and procedures to accumulate information from officers and directors about their 10b5-1 plans.  In addition, adopting a compliant insider trading policy, or, as necessary, updating insider trading policies, will be necessary.

You can find more information about the changes to the use of Rule 10b5-1 plans, including the cooling-off period and certification provisions, in this blog post.

As always, your thoughts and comments are welcome!

So Many Form 10-Q and 10-K Changes! [Part 1 of 5]

Hot Topic, Reporting

In late 2022 and early 2023, the SEC adopted four Final Rules that created a raft of new and detailed reporting requirements in Forms 10-Q and 10-K.  (The rules also affected proxy statements – more about that in a later post.)

This is the first of five posts that provide details and suggestions to help companies analyze and implement these changes in coming periodic reports. This post summarizes all the disclosure changes in Forms 10-K and 10-Q.  The next four posts will go into the details of the changes for each of the four new rules.  Here is a list of our upcoming posts to help appropriately implement these new disclosures requirements:

    • Insider Trading Arrangements and Related Disclosures (Rule 10b5-1 Plans) [Part 2 of 5]
    • Listing Standards for Recovery of Erroneously Awarded Compensation Disclosures [Part 3 of 5]
    • Share Repurchase Disclosure Modernization Disclosures [Part 4 of 5]
    • Pay Versus Performance Disclosures (Proxy statement only disclosures) [Part 5 of 5]

Below is a big-picture summary of all the Form 10-Q and 10-K disclosure changes, Item by Item:

Overview of Changes to Form 10-Q

Part II – Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities.

The old month-by-month table of share repurchases has been removed.  New exhibit 26 requires daily details of share repurchases.  New language in S-K Item 703 requires narrative disclosure of the rationale and purpose of share repurchases.  These changes are effective for the first full fiscal quarter beginning on or after October 1, 2023 (so the first time that this will appear for most companies is the 10-K for the year ended December 31, 2023).

Part II – Item 5. Other Information.

Now includes detailed disclosures of:

      • Quarterly disclosures regarding the adoption, modification or termination by officers and directors of Rule 10b5-1 plans and “non-10b5-1 trading arrangements” (S-K Item 408(a)). This change was effective for the first full fiscal quarter beginning on or after April 1, 2023 – e., now.
    •  
      • Company 10b5-1 plans. (S-K Item 408(d)) This change is effective for the first full fiscal quarter beginning on or after October 1, 2023 (so the first time that this will appear for most companies is the 10-K for the year ended December 31, 2023).

 Part II – Item 6 – Exhibits.

New exhibit in S-K Item 601:

      • Exhibit 26 for daily details of share repurchases. This change is effective for the first full fiscal quarter beginning on or after October 1, 2023 (so the first time that this will appear for most companies is the 10-K for the year ended December 31, 2023).

Overview of Changes to Form 10-K

Two new check boxes on the cover page related to clawback disclosures:

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. □

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). □

These boxes already have been added to the cover of the 10-K; however, they will apply only to issuers with exchange-listed securities.  Additionally, for those issuers, no response to the disclosures is required until after October 2, 2023, when the exchange listing standards become effective.

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The old month-by-month table of share repurchases has been removed.  New exhibit 26 requires daily details of share repurchases.  New language in S-K Item 703 requires narrative disclosure of the rationale and purpose of share repurchases. As stated above, these changes are effective for the first full fiscal quarter beginning on or after October 1, 2023 (so the first time that this will appear for most companies is the 10-K for the year ended December 31, 2023).

Item 9B. Other Information.

Now includes detailed disclosures of:

      • Quarterly disclosures regarding the adoption, modification or termination by officers and directors of Rule 10b5-1 plans and “non-10b5-1 trading arrangements” (S-K Item 408(a)).As stated above, this change was effective for the first full fiscal quarter beginning on or after April 1, 2023 – e., now – and the fourth quarter of each year will be reflected in the 10-K.
      • Company 10b5-1 plans (S-K Item 408(d)). This change is effective for the first full fiscal quarter beginning on or after October 1, 2023 (so the first time that this will appear for most companies is the 10-K for the year ended December 31, 2023).

Item 10. Directors, Executive Officers and Corporate Governance.

Now includes information about insider trading policies – S-K Item 408(b). This change is effective for 10-Ks for fiscal year ending on or after December 31, 2024 as well as for proxy statements for 2025 annual meetings.

Item 11. Executive Compensation.

Now requires:

      • Details of any recovery of erroneously awarded compensation (S-K 402(w)), and related changes to executive compensation disclosures.These disclosures are required on or after December 1, 2023 for issuers who have securities listed on a national securities exchange.
      • Disclosures about policies and practices related to the grant of certain equity awards close in time to the release of material nonpublic information (S-K Item 402(x)). This change is effective for 10-Ks for fiscal year ending on or after December 31, 2024 as well as for proxy statements for 2025 annual meetings.
      • (Note:The new pay versus performance disclosures (S-K 402(v)) are NOT required in Form 10-K.  They are only required in proxy statements.)

Item 13. Certain Relationships and Related Transactions, and Director Independence.

Administrative updates related to recovery of erroneously awarded compensation (S-K Item 404, Instruction 5a)

Item 15. Exhibit and Financial Statement Schedules.

New exhibits, all in S-K Item 601:

      • Exhibit 26 for daily details of share repurchases – as stated above, this change is effective for the first full fiscal quarter beginning on or after October 1, 2023 (so the first time that this will appear for most companies is the 10-K for the year ended December 31, 2023).
      • Exhibit 97 for clawback policies – as stated above, this change is effective on December 1, 2023 for issuers who have securities listed on a national securities exchange.
      • Exhibit 19 for insider trading policies – as stated above, this change is effective for 10-Ks for fiscal year ending on or after December 31, 2024.

Our next post will review the 10b5-1 plan  disclosures in detail.

As a final note, here are links to each of the Final Rules that create these changes:

Insider Trading Arrangements and Related Disclosures (Rule 10b5-1 Plans)

Listing Standards for Recovery of Erroneously Awarded Compensation Disclosures

Share Repurchase Disclosure Modernization Disclosures

Pay Versus Performance Disclosures

As always, your thoughts and comments are welcome!

Focus on SEC Comments – Non-GAAP Measure EBITDA Adjustments – Part One

Reporting, SEC Comment of the Week

Non-GAAP measures have been at or near the top of frequent SEC comment letter topics for several years.  While some non-GAAP comments deal with straightforward issues such as not presenting the related GAAP measure with equal or greater prominence, other comments focus on more complex issues.

The presentation that Rite Aid used for “facility exit and impairment charges” in its presentation of Adjusted EBITDA presents one of these complex issues.  Below is Rite Aid’s  reconciliation for its presentation of adjusted EBITDA:

Rite Aid also included this narrative disclosure about adjusted EBITDA:

In addition to net income (loss) determined in accordance with GAAP, we use certain non-GAAP measures, such as “Adjusted EBITDA”, in assessing our operating performance. We believe the non-GAAP measures serve as an appropriate measure in evaluating the performance of our business. We define Adjusted EBITDA as net income (loss) excluding the impact of income taxes, interest expense, depreciation and amortization, LIFO adjustments (which removes the entire impact of LIFO, and effectively reflects the results as if we were on a FIFO inventory basis), charges or credits for facility exit and , goodwill and intangible asset impairment charges, inventory write-downs related to store closings, gains or losses on debt modifications and retirements, and other items (including stock-based compensation expense, merger and acquisition- related costs, non-recurring litigation settlements, severance, restructuring-related costs, costs related to facility closures, gain or loss on sale of assets, the gain or loss on Bartell acquisition, and the change in estimate related to manufacturer rebate receivables). We reference this particular non-GAAP financial measure frequently in our decision-making because it provides supplemental information that facilitates internal comparisons to the historical periods and external comparisons to competitors. In addition, incentive compensation is primarily based on Adjusted EBITDA and we base certain of our forward-looking estimates on Adjusted EBITDA to facilitate quantification of planned business activities and enhance subsequent follow-up with comparisons of actual to planned Adjusted EBITDA.

While these disclosures are detailed, the SEC focused on facility exit and impairment charges in a letter dated February 21, 2023:

  1. We note in calculating Adjusted EBITDA you excluded facility exit charges. The adjustment appears to remove a normal, recurring, operating expense. Additionally, we note you exclude the change in estimate related to manufacturer rebate receivable which appears to result in an individually tailored recognition and measurement method. Please tell us how these adjustments are appropriate or revise your presentation to omit these adjustments. Refer to Questions 100.01 and 100.04 of the Staff’s Compliance and Disclosure Interpretations on Non-GAAP Financial Measures. Our comment also applies to Adjusted Net Income (Loss).

In this post we will discuss the issue surrounding the facility exit charges.  We will explore the manufacturer rebate issue in a later post.  With respect to the facility exit charges, the C&DI that the staff is referring to about this adjustment was updated in December 2022:

Question 100.01

Question: Can certain adjustments, although not explicitly prohibited, result in a non-GAAP measure that is misleading?

Answer: Yes. Certain adjustments may violate Rule 100(b) of Regulation G because they cause the presentation of the non-GAAP measure to be misleading. Whether or not an adjustment results in a misleading non-GAAP measure depends on a company’s individual facts and circumstances.

Presenting a non-GAAP performance measure that excludes normal, recurring, cash operating expenses necessary to operate a registrant’s business is one example of a measure that could be misleading.

When evaluating what is a normal, operating expense, the staff considers the nature and effect of the non-GAAP adjustment and how it relates to the company’s operations, revenue generating activities, business strategy, industry and regulatory environment.

The staff would view an operating expense that occurs repeatedly or occasionally, including at irregular intervals, as recurring. [December 13, 2022]

The company’s response on March 13, 2023, reviewed the calculation and explained their rationale for the adjustment for facility exit costs:

Adjusted EBITDA has long been used by the Company’s management and investors as one of the primary measures to evaluate both Company and management performance. The Company believes that the current methodology in calculating Adjusted EBITDA appropriately eliminates certain charges that do not reflect ongoing operations and underlying operational performance. The Company’s facility exit charges are costs associated with the closure of stores, distribution centers and corporate facilities and include establishing, at net present value, a liability for future costs associated with the exit activity pursuant to ASC 420-10. During fiscal year 2022, the Company announced a Board-approved multi-year strategic initiative designed to improve overall performance by reducing costs, driving improved profitability, and ensuring that the Company has a healthy foundation to grow from by eliminating underperforming stores. This initiative resulted in the expectation of closing 195 stores, of which 48 were closed in FY22 with the remainder expected to close in future periods. In addition, the strategic plan also included plans to exit certain corporate facilities as the Company moved toward its remote-first workplace strategy. Because the decision to close these facilities was part of a significant strategic project, the magnitude of the store closures was greater than what would be expected as part of ordinary business, and these facilities no longer have an impact on the Company’s present and go-forward operations, revenue generating activities or business strategy, the Company has determined that these costs do not constitute normal operating activities represented by Adjusted EBITDA and that excluding facility exit charges from its calculation of Adjusted EBITDA does not result in a non-GAAP measure that is misleading under the criteria in Question 100.01 of the Staff’s Compliance and Disclosure Interpretations on Non-GAAP Financial Measures. In addition to using Adjusted EBITDA as a primary measure to evaluate Company and management’s performance, the Company’s senior secured credit facility agreement (“SSCF”) defines Consolidated EBITDA as excluding facility exit charges and, as the calculation of its key credit ratios in the agreement are tied to Consolidated EBITDA, the Company believes that it is appropriate for its publicly disclosed measurement of Adjusted EBITDA to closely conform with the definition of Consolidated EBITDA in its SSCF to provide investors with clear line of sight into its credit metric calculations.

After Rite Aid made this response, the SEC issued a follow-on comment.  Our next post will explore the follow-on comment, the company’s response, and the resulting change in disclosure.

As always, your thoughts and comments are welcome!

SEC Approves NYSE and NASDAQ Clawback Listing Standards

Hot Topic, Reporting

As we discussed in this blog post, as part of implementing the Dodd-Frank clawback provisions, the SEC required the NYSE and NASDAQ to adopt appropriate clawback listing standards.

On June 9, 2023, the SEC approved the NYSE’s and NASDAQ’s clawback listing standards, which will be effective on October 2, 2023.  Companies listed on the NYSE and NASDAQ will be required to adopt appropriate clawback policies by December 1, 2023.  These policies will apply to any incentive-based compensation paid after October 2, 2023.

As always, your thoughts and comments are welcome.

Focus on SEC Comments – Metrics and Related Disclosures

Comment of the Week, Reporting

Metrics and other key performance indicators present complex disclosure considerations that are similar to issues surrounding the use of non-GAAP measures.  It is important to remember that disclosure of metrics may be required, particularly in MD&A.  Regulation S-K Item 303 makes this clear:

“The discussion and analysis must be of the financial statements and other statistical data that the registrant believes will enhance a reader’s understanding of the registrant’s financial condition, cash flows and other changes in financial condition and results of operations.”

If management uses metrics and believes this information is important to an understanding of financial condition and financial performance, disclosing metrics could be a necessary part of providing “management’s perspective” as discussed in S-K Item 303:

“A discussion and analysis that meets the requirements of this paragraph (a) is expected to better allow investors to view the registrant from management’s perspective.”

When companies disclose metrics, the SEC focuses on them in almost the same way it focuses on non-GAAP measures.  Financial Release 87, issued in 2020, addresses disclosure requirements for metrics and key performance indicators:

“…the company should consider what additional information may be necessary to provide adequate context for an investor to understand the metric presented.  We would generally expect, based on the facts and circumstances, the following disclosures to accompany the metric:

      • A clear definition of the metric and how it is calculated;
      • A statement indicating the reasons why the metric provides useful information to investors; and
      • A statement indicating how management uses the metric in managing or monitoring the performance of the business.

The company should also consider whether there are estimates or assumptions underlying the metric or its calculation, and whether disclosure of such items is necessary for the metric not to be materially misleading.”

The Walt Disney Company’s Form 10-K for the year ended October 1, 2022, included an important metric for streaming services, revenue per paid subscriber, along with this narrative:

The average monthly revenue per paid subscriber for domestic Disney+ was comparable to the prior year, as an increase in retail pricing and a lower mix of wholesale subscribers was essentially offset by a higher mix of subscribers to multi-product offerings.

The average monthly revenue per paid subscriber for international Disney+ (excluding Disney+ Hotstar) increased from $5.31 to $6.10 due to increases in retail pricing, partially offset by an unfavorable foreign exchange impact.

The average monthly revenue per paid subscriber for Disney+ Hotstar increased from $0.68 to $0.88 driven by higher per-subscriber advertising revenue and increases in retail pricing, partially offset by a higher mix of wholesale subscribers.

The average monthly revenue per paid subscriber for ESPN+ increased from $4.57 to $4.80 primarily due to an increase in retail pricing, a lower mix of annual subscribers and higher per-subscriber advertising revenue, partially offset by a higher mix of subscribers to multi-product offerings.

The average monthly revenue per paid subscriber for the Hulu SVOD Only service decreased from $12.86 to $12.72 driven by lower per-subscriber advertising revenue, a higher mix of subscribers to multi-product offerings and, to a lesser extent, to promotional offerings, partially offset by an increase in retail pricing.

The average monthly revenue per paid subscriber for the Hulu Live TV + SVOD service increased from $81.35 to $87.62 driven by an increase in retail pricing and higher per-subscriber advertising revenue, partially offset by a higher mix of subscribers to multi-product offerings.

Clearly, the “higher mix of subscribers to multi-product offerings” is a significant issue for Disney.  This led the SEC staff to issue this comment focused on the level of detail provided for this metric:

  1. We note from your disclosure that average monthly revenue per paid subscriber was negatively impacted “by a higher mix of subscribers to multi-product offerings.” Similarly, in your Q4 2022 earnings release furnished on Form 8-K, certain Direct-to- Consumer platforms experienced decreasing quarterly period over period average monthly revenue per subscriber which was attributed to “a higher mix of subscribers to multi-product offerings.” We also noted from your Q4 earnings call, bundled and multi-product offerings now account for over 40% of your fiscal year-end domestic Disney+ subscriber count. It appears that customers participating in bundled and multi-product offerings has both an impact on your subscriber growth and revenues, please enhance your disclosures to include the total customers participating in bundled and multi-platform offerings for the periods presented for both your domestic and international DTC offerings. While your definition of “Paid subscribers” explains that bundled/multi- offering subscribers are counted as paid subscribers for each service listed in the table on page 40, please consider separately quantifying total subscribers for all DTC services in the aggregate and parenthetically highlighting in the introduction to the table that amounts for specifically listed offerings do not aggregate to the number of total DTC subscribers. (April 4, 2023)

The company’s response was direct and to the point:

The Company appreciates the Staff’s comment and respectfully advises that in future filings, starting with its next quarterly report, the Company will enhance its disclosure to include total customers participating in our bundled and multi-platform offerings for the periods presented for our domestic and international offerings, as requested by the Staff. The Company will also consider separately quantifying total subscribers for all DTC services in the aggregate and parenthetically highlighting that amounts for specifically listed offerings do not aggregate to the number of total DTC subscribers in future filings, as requested by the staff.

After this response CorpFin issued their normal closing letter.

As always, your thoughts and comments are welcome.

SEC’s Spring 2023 Regulatory Agenda Released

Hot Topic, Reporting

On June 13, 2023, the Office of Information and Regulatory Affairs, of the U.S. Government’s Office of Management and Budget, released the “Spring 2023 Unified Agenda of Regulatory and Deregulatory Actions,” which includes the short-term and long-term projects on the SEC’s regulatory agenda.

In a Statement about the agenda, Chair Gary Gensler said:

“Taken together, the items on this agenda would advance our three-part mission: to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.

Technology, markets, and business models constantly change. Thus, the nature of the SEC’s work must evolve as the markets we oversee evolve.

In every generation since President Franklin Roosevelt’s, our Commission has updated its ruleset to meet the challenges of a new hour. Consistent with our legal mandate, guided by economic analysis, and informed by public comment, this agenda reflects the latest step in that long tradition. Thus, I am pleased to support it.”

As you review the short-term agenda, you will find that both the SEC’s climate-related disclosures and cybersecurity risk projects are scheduled for the final rule process in October 2023.

As always, your thoughts and comments are welcome!

Focus on SEC Comments – MD&A Material Change Disclosures

Comment of the Week, Reporting

MD&A is consistently at or near the top of most frequent SEC comment areas.  As we discussed in this post, one frequent comment area is robust disclosure of both quantitative and qualitative information about material changes in financial statement line items.  This requirement is clear in Regulation S-K Item 303:

“Where the financial statements reflect material changes from period-to-period in one or more line items, including where material changes within a line item offset one another, describe the underlying reasons for these material changes in quantitative and qualitative terms.”

 To illustrate this comment, here is a revenue disclosure from Rite Aid’s Form 10-K for its year-end February 26, 2022:

(Here is the narrative disclosure in larger type:)

Revenues

Pharmacy Services segment revenues decreased $647.0 million in fiscal 2022 compared to fiscal 2021. The decrease in the fiscal 2022 revenues was primarily the result of a planned decrease in Elixir Insurance membership and a previously announced client loss due to industry consolidation.

The SEC staff issued this comment asking Rite Aid to provide more robust disclosure surrounding the change in revenue for this segment:

Management’s Discussion and Analysis of Financial Condition and Results of Continuing Operations
Pharmacy Service Segment Results of Operations, Revenues, page 58

    1. We note “[t]he decrease in the fiscal 2022 revenues was primarily the result of a planned decrease in Elixir Insurance membership and a previously announced client loss due to industry consolidation.” We were not able to obtain an understanding of these events or their impact on your results from your disclosure. Please provide more robust disclosure surrounding these events or indicate where these events are previously disclosed within your document. Reference is made to Item 303 of Regulation S-K. (February 21, 2023)

The company’s response was simple and direct:

Although the Company believes that its existing disclosures are adequate, in light of the Staff’s comment, in future filings that reference this decrease, the Company will modify its disclosure to reflect the following:

Pharmacy Services segment revenues decreased $647.0 million in fiscal 2022 compared to fiscal 2021. Approximately $42 million of the decline was the result of a decrease in Elixir Insurance membership due to a change in the Company’s pricing structure. Approximately $500 million of the decline was the result of a loss of a large commercial client, which the Company had previously announced in June 2021.

This is an easily avoidable comment given that the requirement for both quantitative and qualitative discussion of the reason for material changes in lines items is clearly articulated in S-K Item 303.

As always, your thoughts and comments are welcome.

Corp Fin Clarifies Transition to New Rule 10b5-1 Plan Disclosures

Hot Topic, Reporting

In the SEC’s December 14, 2022, Final Rule, Insider Trading Arrangements and Related Disclosures, the transition provisions provided:

    • Issuers that are SRCs will be required to comply with the new disclosure and tagging requirements in Exchange Act periodic reports on Forms 10-Q, 10-K and 20-F and in any proxy or information statements that are required to include the Item 408, Item 402(x), and/or Item 16J disclosures in the first filing that covers the first full fiscal period that begins on or after October 1, 2023.
    • All other issuers will be required to comply with the new disclosure and tagging requirements in Exchange Act periodic reports on Forms 10-Q, 10-K and 20-F and in any proxy or information statements that are required to include the Item 408, Item 402(x), and/or Item 16J disclosures in the first filing that covers the first full fiscal period that begins on or after April 1, 2023.

This language is clear with respect to which quarter would start this reporting for Form 10-Q, but was a bit unclear about when an annual report on Form 10-K or 20-F would require the annual disclosures.  On May 25, 2023, the staff issued three Compliance and Disclosure Interpretations to clarify this timing issue and address when proxy statements will require these disclosures and explain when a situation where a person with two plans may create an “effective cooling off period.”

As you read these C&DI’s, you will note that the transition for the quarterly disclosures is in fact different from the transition for annual disclosures.  Generally, the quarterly disclosures include information about officer and director 10b5-1 plans and the annual disclosures include information about insider trading policies and grants of equity awards made close in time to the release of material non-public information.

Question 120.26

Question: When are companies required to begin providing the quarterly Item 408(a) disclosures and the annual Item 402(x) and Item 408(b) disclosures (Item 16J of Form 20-F disclosures for foreign private issuers) in periodic reports?

Answer: Release No. 33-11138 states that companies other than smaller reporting companies will be required to comply with the new disclosure and tagging requirements in Exchange Act periodic reports on Forms 10-Q, 10-K and 20-F “in the first filing that covers the first full fiscal period that begins on or after April 1, 2023.” Therefore, the following compliance dates apply:

      • December 31 fiscal year-end company – Quarterly disclosures must first be provided in the Form 10-Q for the period ended June 30, 2023, and should continue to be provided in the Form 10-Q for the period ended September 30, 2023 and the Form 10-K for the fiscal year ended December 31, 2023.
      • June 30 fiscal year-end company – Quarterly disclosures must first be provided in the Form 10-K for the fiscal year ended June 30, 2023.
      • December 31 fiscal year-end company – Annual disclosures must first be provided in the Form 10-K or 20-F for the fiscal year ended December 31, 2024.
      • June 30 fiscal year-end company – Annual disclosures must first be provided in the Form 10-K or 20-F for the fiscal year ended June 30, 2024.

Smaller reporting companies must comply with these new disclosure and tagging requirements in the first filing that covers the first full fiscal period that begins on or after October 1, 2023. Therefore, the following compliance dates apply:

      • December 31 fiscal year-end company – Quarterly disclosures must first be provided in the Form 10-K for the fiscal year ended December 31, 2023.
      • June 30 fiscal year-end company – Quarterly disclosures must first be provided in the Form 10-Q for the period ended December 31, 2023.
      • December 31 fiscal year-end company – Annual disclosures must first be provided in the Form 10-K or 20-F for the fiscal year ended December 31, 2024.
      • June 30 fiscal year-end company – Annual disclosures must first be provided in the Form 10-K or 20-F for the fiscal year ended June 30, 2025. [May 25, 2023]

Question 120.27 

Question: When are companies required to begin providing the disclosures in proxy or information statements?

Answer: For transition purposes only, companies other than smaller reporting companies must first provide this information in proxy statements for the first annual meeting for the election of directors (or information statements for consent solicitations in lieu thereof) after completion of the first full fiscal year beginning on or after April 1, 2023. Smaller reporting companies must first provide this information in proxy statements for the first annual meeting for the election of directors (or information statements for consent solicitations in lieu thereof) after completion of the first full fiscal year beginning on or after October 1, 2023.[May 25, 2023]

Question 120.28

Question: The Rule 10b5-1(c) affirmative defense generally is not available if a person has multiple Rule 10b5-1 contracts, instructions, or plans in place. However, Rule 10b5-1(c)(1)(ii)(D)(2) permits a person (other than the issuer) to maintain two separate Rule 10b5-1 plans at the same time so long as trading pursuant to the later-commencing plan is not authorized to begin until after all trades under the earlier-commencing plan are completed or have expired without execution. If an individual terminates the earlier-commencing plan (i.e., the earlier-commencing plan does not end by its terms and without any action by the individual), when can trading begin under the later-commencing plan?

Answer: Pursuant to Rule 10b5-1(c)(1)(ii)(D)(2), if an individual terminates the earlier-commencing plan, the later-commencing plan will be subject to an “effective cooling-off period.” The effective cooling-off period will begin on the termination date of the earlier-commencing plan and will last for the time period specified in Rule 10b5-1(c)(1)(ii)(B). On the other hand, if the earlier-commencing plan ends by its terms without action by the individual, the cooling-off period for the later-commencing plan is not reset and trading may begin as soon as the plan’s original cooling-off period is satisfied. Depending on when the later-commencing plan was adopted, this could be as soon as immediately after the earlier-commencing plan ends. See Footnote 180 of Release No. 33-11138.[May 25, 2023]

As a reminder, the Final Rule requires that Section 16 reporting persons comply with the amendments to Forms 4 and 5 filed on or after April 1, 2023.

The staff has prepared a very helpful Small Entity Compliance Guide which provides a good overview of the rule.

As always, your thoughts and comments are welcome!